The U.S. Is Accidentally Pushing Kurdistan Toward Independence From Iraq

Kurdish oil is sitting off the Texas coast right now—and a U.S. judge just ordered its seizure

July 29, 2014

The Kurdistan Regional Government's efforts to export its own oil, against the wishes of the Iraqi and U.S. governments, saw a significant achievement last week: Reuters reported Thursday that a tanker carrying more than $100 million of crude oil was headed for Galveston, Texas. But just days later, on Monday night, a U.S. judge sided with an Iraqi Oil Ministry complaint that the KRG had "misappropriated" the one million barrels, and she ordered their seizure.

Prior to the court order, an Obama administration official had finessed the embarrassing predicament, clarifying that the government had never banned private companies from purchasing Kurdish oil. But the United States' attempts to stem the autonomous flow of Kurdish oil have been well documented, in keeping with their goal of a unified Iraq. In fact, the administration's opposition to Kurdistan’s oil sales will push the Kurds toward an independence bid. To understand why, we must look back several weeks.

When a private company in Israel purchased Kurdish oil in late June, many believed it was only a matter of time before the greater market for Kurdish oil broke open. Kurdish officials spoke with confidence about the impending sale of other shipments, and discussed the process for obtaining and disbursing the funds deposited in Turkey’s state-owned Halkbank, an account established with the express purpose of granting the KRG—and not Baghdad—authority over its own oil revenues.

Yet, by mid-July, Rudaw—Kurdistan’s largest media outlet—reported that Turkey had backtracked, insisting on a deal between Erbil and Baghdad over revenue-sharing before Halkbank would release the money. With major financial disputes over budget allocations, provision of services regionally and nationally, and reparations for Saddam-era crimes, the chasm between the respective positions has never been wider. A deal in the near term is nearly unthinkable.

U.S. pressure almost certainly factored into Turkey’s return to Solomonic even-handedness on Kurdish oil. U.S. diplomats have engaged actively with governments linked to Kurdish oil purchases, not-so-gently reminding them of potential exposure to Baghdad-initiated international trade arbitration.

This tack has proven most effective with Turkey, whose energy relationship with Iraq is governed in large part by the Iraq-Turkey Pipeline agreement. In a detailed analysis of Iraq’s domestic oil dispute, the international law firm Baker Botts outlined the problem for Turkey. Despite legitimate and well-grounded disagreement over constitutional interpretation, Baghdad stands on firmer terrain with its claim of exclusive control of Iraq’s end of the ITP. Though Kurdish oil is technically Iraqi oil, the ITP is not structured as a multi-user agreement, and Iraq explicitly retains rights to the pipeline’s excess capacity. Turkey would shy away from actions that might spur an international trade dispute—all the more so since its legal case would be far from airtight.

The KRG finds itself in deep trouble if it cannot access the proceeds from oil sales. Leaving aside the eager-to-be-paid international oil companies, Baghdad has failed to pay Kurdistan its share of the national budget since March—a punitive measure taken in the ever-expanding dispute. Cash flows from oil sales independent of Baghdad would have eased the budgetary crisis, but U.S. pressure has helped ensure the Kurds find no relief.

The U.S.’s logic is clear. KRG oil sales provide the Kurds a financial base with which to stabilize a potential fledging independent state. If the Kurds are unable to sell oil, they will have to parlay with Baghdad to solve the budgetary dispute. However, the U.S. misjudges the Kurds—both their likely steps after independent oil sales and their response to interference with oil revenues.

Distinct Kurdish oil sales have always been more likely to bring the KRG to the Iraqi bargaining table. They seek concessions from the central government, and the threat posed by independent revenue streams may be more valuable than the ability to declare national independence.

First, Kurdistan benefits greatly from its access to the greater Iraqi market. Kurdish businesses of all sizes are bolstered by a market size of 30 million people, and these businesses would suffer from an independence bid that—at least in the near term—slashed the market size by five-sixths. A fledgling independent Kurdistan with a hobbled private sector would rely even more heavily on oil revenues—intensifying the oil-fueled Dutch disease and jeopardizing the nascent country’s economic health.

Second, the Kurds have historically—and to this day—looked for opportunities to strike bargains with their Arab co-nationalists to the south. During the civil war in 1996, Kurdistan President Massoud Barzani’s Kurdistan Democratic Party invited Saddam Hussein’s forces into the Kurdish region to bolster the KDP in its fight with the Patriotic Union of Kurdistan. Kurdish history is filled with many more prosaic examples.

The KRG displayed its traditional pragmatic spirit after the pesh merga moved into the areas of Kirkuk vacated by the Iraqi armed forces. Once in control of Kirkuk’s oil establishments, the KRG initially demanded an increase in its share of the national budget from 17 to 25 percent, to account for increases in the population served—and energy resources controlled—by the KRG. Having just taken control of one of the largest, highest quality oil fields in the world, the Kurds spoke not of an independence bid but of renegotiating terms with Baghdad.

Now, the efforts of Baghdad and the U.S. to foil KRG oil sales may ultimately compel Kurdistan to declare independence. Without funding from the central government, and lacking access to revenues earned from KRG oil sales, Kurdistan is starved for finances. Short-term solutions of borrowing and belt-tightening are exactly that.

If Kurdistan declares independence, its options for oil sales proliferate. The ITP agreement stipulates that Turkey controls the pipeline segment in its territory. An independent Kurdistan with pipelines directly into Turkey would strengthen the Turks’ legal position, and increasing Kurdish production might incentivize Turkey to abrogate the ITP entirely. The civil war in Iraq inspires little confidence that Baghdad will begin pumping through the ITP anytime soon.

Despite Barzani’s rousing calls, a swift move toward independence could be unsettling. The KRG might prefer to use its control over Kirkuk and its military strength to pressure Baghdad to renegotiate terms. But, cut out of the state budget and frozen out of its own oil revenues, the Kurds may have little choice but to declare. The Baghdad-U.S. front designed to stymie Kurdish independence may be the very reality driving the Kurds ineluctably toward it.